Europe lifts interest rates to highest in a decade
Europe edged closer to recession today as the European Central Bank lifted its main interest rate to the highest in over a decade, making borrowing and repaying debt more expensive.
In the latest sign that central banks are ramping up the fight against inflation – which has hit a record 9.9% in the eurozone – the ECB delivered its second straight 75-basis-point interest rate hike. Unlike in September, the ECB’s council was unanimous in its decision.
The ECB is now raising borrowing costs at the fastest pace on record. It also took the first step today towards shrinking its 8.8 trillion euro balance sheet by announcing it is scaling back support for European commercial banks. It is changing the terms and conditions of its ultra-cheap loans, known as TLTROs, a tool that provided banks with attractive borrowing conditions, designed to incentivise lending.
However, the ECB did not provide any details as to when it will begin the process of quantitative tightening, only that this will be discussed at the next meeting in December when another hike can be expected.
Away from Europe, the hawkish Federal Reserve is widely expected to hike US interest rates by 75 basis points for the fourth consecutive time at its meeting next week.
That said, surprising new data today may have some implications for the Fed’s future approach.
U.S economic growth rebounded stronger than expected in the third quarter – at an annual rate of 2.6% – according to a new report from America’s Commerce Department. This rebound in growth, after two straight quarterly declines in GDP, provides further evidence that the US economy is not yet in a recession.
What these latest figures indicate for US policy aimed at taming inflation is being interpreted differently.
Some analysts hope this means that the Fed will take the foot off the interest rate pedal.
That said, it could have opposite effect, since it dampens fears about high interest rates triggering a recession. Warnings of a weakened US economy had previously fuelled speculation the Fed might slow its aggressive monetary tightening. So new evidence that the economy is rebounding might encourage the Fed to double down on its hawkish approach. But, as some analysts are pointing out, most of the growth came from higher exports while the domestic economy has slowed. They fear that the next growth will show a slowdown as higher rates feed through into the economy.
The UK’s Bank of England is also due to decide on interest rates when it meets next week and most economists predict another rise. By how much is the big question. Last month, the Bank raised interest rate by 0.5% to 2.25% – the highest level since the 2008 financial crash – but less than the 0.75 % forecast.
Since last month’s rise the UK economy has been on something of a roller-coaster and inflation is running at a 40 year high of 10.1%. When the Bank meets next Thursday, traders are now predicting it will finally follow in the footsteps of its US and European counterparts and go for a higher 75 bp hike. With the OBR’s forecast coming next Monday on the UK’s finances – and the Bank starting its quantitative tightening next Tuesday – such a big rise is bound to be keenly debated.
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